"Have you met the cretins we have in Westminster? Do you think we can be worse than that?" --- Nigel Farage

FTSE 100

DOW JONES

NASDAQ

CAC 40

DAX

Tuesday, 5 January 2010

Absence of posting

I have had a few comments and emails bemoaning the lack of posting for the last few weeks, indeed a few hoping that I have not given up posting. Apologies to those who have missed getting their financial fix but this due to a number of reasons:

Christmas is a big even at Masterley Towers. Not just on the day but also in the ays leading up to Christmas. So much to do, so little time.

December is a busy month for deal completions. This year there wasn't a lot of new business but there were some time consuming restructurings.

There hasn't been a lot of financial news.

At least not that was really ground breaking or significant enough to blog about. Two items that might have merited a post they hadn't been done to death here over the last year would have been the government's spending outturn, which came in at £617.9 billion, and the Oxford Economics report which said that UK GDP per capita is lower now than it was in 2005.

On the first point, the issue wasn't so much the headline figure for Total Managed Expenditure but the shenanigans by which the government arrived at the figure. The details are here.

This year the government "spent" £91.449 billion on "non-cash" items of resource departmental expenditure up from £49 billion last year and on a rising trend from £28 billion from 2004/5. They also spent £85 billion on "other capital expenditure" (prior years negligible or negative). Now because those two unpalatable sums would have upset the numbers, the government made 2 "accounting adjustments" (read that as "reductions in reported spending") of £87 billion of revenue expenditure and £98 billion of capital expenditure.

Now as already reported here, we know that a lot of the £87 billion of "non-cash" items that the government doesn't want to count as current expenditure relates to PFI, where departments sign as service recipients under service contracts on terms that would normally dictate that they should capitalise the underlying asset and book the service contract as a financial liability, only when it comes to reporting government figures, the liability is "adjusted" away.

And then again we now that the government argues that all of the money it spends on bank shares doesn't really count as expenditure because it is supported by assets - which is a bit like saying spending isn't spending if in the process a valuable asset is acquired (i.e. pure tosh). OK, say the government, it doesn't count as part of Total Managed Expenditure because it is a one-off. Try that line with your bank manager (e.g. "No, I am not really overdrawn, because it was a one-off, just like the government and the bank bail-outs").

So that's £185 billion of spending that the government says we didn't really have, but the media and the opposition don't make a fuss.

And then we have the Oxford Economics report, which made some of the papers, saying that GDP per person is no higher than it was after the last General Election. Which sounds bad, but as discussed here throughout 2009, the reality is far worse.

GDP is a measure of public and private consumption, and whereas public consumption has grown at the rate or 6-8% for the last several years, public sector activity has gone the other way, so that as reported here 6 months ago, in inflation adjusted terms, private sector consumption per capita has declined by 25% since 2003, whereas public sector consumption has grown by more than 30%, so that GDP (interpreted by the government as a measure of economic activity) is largely flat.

Brown play ed on this as Chancellor, knowing that he could put his foot on the government spending gas pedal at any time so that he could always say that GDP was growing at 3% and hitting growth targets. The reality was that the "quality" of the GDP declined. The value of goods and services freely traded in the private sector, rather than the value of money blown by the government to support whatever scheme they thought would give the illusion of economic growth, has fallen rapidly. We have now reached a point where the government bleats that cutting expenditure would lead to a further recession, even though the value for money from current expenditure is very poor. How many £1,000 a day consultants does the NHS really need? But if we follow their Keynesian logic with 3x multiplier effects (not that I believe that figure) we would conclude that instead of a £175 billion deficit, £525 billion of GDP is unsustaianable. The best solution is to cut spending back to mid-2000 levels, suffer the pain and rebuild the economy on a more realistic basis.

7 comments:

JiveLad
said...

I guess the media are more concerned with snow stories right now. The point that you make about the value of goods and services freely traded in the private sector is very important. I wonder if the Conservative party truly understand this - and what is required.PS - What about the gilt auction this morning?

As someone who did old style "welfare economics" a long time ago, I keep saying that one way to increase GDP is for everyone to drive long distances around motorways to big shopping malls to spend money they do not have on rubbish they do not need. There are many and various public sector equivalents of this.

re: when expenditure is not expenditure: I would particularly like, as an art dealer, to use the line about it not being expenditure when I buy a painting, would make the working overdraft a lot easier to explain to the bank

Technically, if you buy an asset for cash then that asset remains on your balance sheet, you have merely replaced an asset (cash) with another asset (shares in banks). These aren't transfer payments (ie pensions) so they shouldn't be recognised in the same way. Not that I don't agree there hasn't been some furious book-cooking going on but this is something done by the private sector just as much as the public.

Your hysterical self-righteousness is somewhat overblown.

PFI is the thing we need to worry about, that doesn't make any sense at all.

Bill, Thanks for your briedf lesson, but I am quite aware of the accounting. It would be nice to think that most government expenditure bought something, but equally it is a preposterous argument to say that no money has been spent because the government has bought a valuable asset (shares). the fact is that like all capital expenditure the government has spent money ad the tax payers will eventually pick up the bill.

As regards hysteria, I don't think I am hysterical or at least not inappropriately so. £1 billion is still a lot of money £185 billion, even more so. For a government to sweep it under the carpet (nearly 1/4 of actual government expenditure) is preposterous.

About Me

Alex is an experienced investment banker working in London's Docklands. He is obsessed with personal status, with his work coming second and his family a distant third. His commitment to status requires him to have all of the latest professional gadgets, including an iPad, a BlackBerry and a 4G mobile phone. Alex usually works for Rupert Sterling at Megabank, but has, in the past, worked for Mr Hardcastle as his Head of Corporate Strategy.

Welcome to MEGABANK

Welcome to Megabank. Our history dates back to the founding of First National Bank of Hoboken in 1812, Mexican Peasants Bank in 1870, Robber Barons Inc. in 1873 and Whiteshoe Brothers in 1910.

Megabank is today’s pre-eminent financial services company, with 10 billion customer accounts in more than 500 countries. We operate through more branches than Starbucks and employ more people than the Chinese People's Liberation Army.

Other brands in the Megagroup portfolio include MegaCards, MegaBucks™, Mega Re:, MegaMortgage, MegaWealthManagement, MegaMoneyLaundry and Penury International Debt Collectors.